Target Costing Maria Osipova Inna Dueck Tatiana Volina

Target Costing Maria Osipova Inna Dueck Tatiana Volina Ivan Kraynev Vladimir Alferov

History Target costing was invented by Toyota in 1965 Reasons: n 80 -90% of the life cycle cost is determined at the design phase of the product (Tanaka) n continuous improvement, “cost kaizen”, inevitably lead to fewer opportunities to cut costs (Tanaka) n SOLUTION: actual costs -> predetermined costs

Definition n Target Costing is defined as a cost management tool for reducing the overall cost of a product over its entire life-cycle with the help of production, engineering, research and design.

TARGET-COSTING PRINCIPLES 1. 2. 3. 4. 5. 6. price-led costing. focus on customers. focus on design. cross-functional involvement. value-chain involvement. a life-cycle orientation. .

Target costing objectives To identify the cost at which the product must be manufactured if it's to earn its target profit margin at its expected or target selling price. n To decompose the production process and then to set cost targets for each product element. n

Approaches to target costing n Price-based targeting n Cost-based targeting n Value-based targeting A target cost is the maximum amount of cost that can be incurred on a product. n Target Cost = Market Price – Expected Margin n

Price-based targeting Sets target cost for the product through comparison with that of competitors n This means setting the price of the product by observing what the market will bear, then deducting the desired profit margin from the price, and thereby obtaining the target cost. n

Cost-based targeting It sets the cost 1 st, then the desired profit margin is derived at the price of the product. n This method requires the suppliers to reveal the very details of their cost structure and will sour the buyer-supplier relationships so itsn’t good for the long run. n

Value-based targeting It sets the price by what it thinks the market will ‘value’ the product n After that, the producer sets the desired profit margin and then tries all ways to keep the cost below that of the target cost. n

Benefits n n n Delivering the optimal value proposition to end customers. Minimizing product-line complexity. Selecting appropriate product and process technologies. Lowering product design late in the innovation process. Eliminating cost overruns.

Negative points possible misuse of the technique. Producers might make use of cost-based target costing to squeeze the profit margins of suppliers, thereby getting materials at the lowest cost possible. n the stress on the design team of companies using target costing n disadvantage to the company. Product development time might be lengthen as product is repeatedly designed to bring cost below that of target. n

Three main elements of the target costing process by Cooper & Slagmulder

Implementation 1. Price-led costing ~ market prices are used to determine target costs 2. Focus on customers ~ value to the customer must be greater than the cost of the product itself 3. Focus on design ~ cost control must occur before production

4. Cross-functional involvement ~ interfunctional product and process teams 5. Value-chain involvement ~ all members of the value chain included 6. Life-cycle orientation ~ minimizing total lifecycle costs

Control Points Top management in case of establishing a new product Cost estimating group decomposing the preset value Cross-functional target costing teams analysing the production process

Similar approach to the target costing by Caterpillar n The main aim: to reduce costs by 5. 4% n The cost of the comparable model is based on current manufacturing capabilities

Similar approach to the target costing by Caterpillar cross-functional organizational team n emphasize cost reduction during the new product development cycle n reduce costs through efficiency improvements n Caterpillar

Similar approach to the target costing by Caterpillar A few areas of reduction: n Assembly n Cab n Engine n Hydraulics n Power Train n Structures n Linkage n Other

Target costing prospectives Target costing which has been widely used by Japanese firms since 1970 s now is spread all over the world n Main industries: transportation and heavy equipment industries (Intensive competition, extensive supply chains, and relatively long product development cycles) n

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